The Algarve, Portugal is one of Europe’s most exclusive holiday, retirement and leisure destinations. Buying a property here is straight forward as long as you know the correct procedure. There follows information about the contractual and legal steps taken for buying a property, from agreeing a price to completion and the costs involved.

PRE CONTRACT

Once your Algarve estate agent has successfully negotiated a deal on your chosen property, a professional company will send a letter of intent that will outline the details of the sale. This will include the price, date of exchange and completion of contract. It should also state what is included in the sale (furniture and furnishings, golf membership etc) and any other conditions. The letter of intent is passed to the buyer’s legal representative as a reference to the agreed terms of the sale by both parties.

EXCHANGE OF CONTRACT

Both parties should be represented by a local lawyer on the Algarve and it is the buyer’s lawyer who will prepare the Promissory Contract (Contrato Promessa de Compra e Venda). Before this is drafted, your legal representative will carry out all the necessary legal searches on the property. Finally, the lawyer will ensure there are no outstanding charges against the property for utility and maintenance costs such as infrastructure charges, property tax and condominium fees. Your lawyer is now ready to finalise the Promissory Contract, which is a legally binding contract and will be signed by both parties in the presence of a Notary in the Algarve.

A 10% non-refundable deposit must be transferred to your lawyer’s clients’ account in time for the signing of this contract to take place. The Promissory Contract will confirm who the buyers and vendors are, details of the Algarve property, including clear title of ownership, completion date, schedule of payments, and if applicable an inventory list will also be attached. It will also include standard penalty clauses in the event that any of the parties do not fulfil the contract. Under Portuguese law, if the vendor does not fulfil the contract they are liable to pay back double the deposit to the purchaser. If the purchaser does not fulfil the contract, their deposit is non-refundable.

COMPLETION

There is usually a period of time between the signature of the Promissory Contract and the signing of the deeds. This will vary from purchase to purchase and depends on the agreed terms. At this stage, as a purchaser you will require a Portuguese Fiscal Number. Your fiscal representative should apply for one and your Algarve lawyer can help and advise you on this matter.

The Escritura is the official deed of transfer from the vendor to you, the new owner. It is a document, which is signed either by you or your lawyer (if you have opted to give them Power of Attoney) at the Public Notary and stays in the hands of the Notary. The Notary reads aloud all the particulars of the deed before everyone signs it. If you do not speak Portuguese your lawyer will check that you understand exactly what is going on at each stage. Once signed, the Escritura gives you official ownership but the property still has to be registered under your name in the Land Registry (Registro Predial). Buyers should request a copy of this registration for their files, this is done by your lawyer. And finally, on completion your lawyer will also change the utility contracts from the old owners into your name.

LEGAL EXPENSES

Lawyers’ fees vary anywhere from 1 to 2% of the purchase price. There are also additional legal expenses connected to the transfer of ownership at the land registry and fiscal department when buying a property in the Algarve, Portugal. These include Notary, stamp duty and registration fees and will amount to around 1% – they need to be paid by the purchaser upon signature of the deeds.

IMT (FORMER SISA)

This is the Portuguese Property Acquisition Tax and should be paid by the purchaser prior to completion. The amount payable varies according to the price of the property. If it is for habitation, the cost is worked out on a sliding scale up to 6%. If it is a plot for construction, the IMT applicable is always 6.5% of the price without any variation. Your lawyer will always advise you of these costs.

PROPERTIES OWNED BY OFF SHORE COMPANIES

Luxury properties on the Algarve are often owned by overseas companies (such as Malta or Delaware) and the buyers will purchase the shares of said company. Although the transaction takes place under the jurisdiction of the company’s domicile, both parties still require a local lawyer to carry out the searches on the property in the usual way. The lawyer will prepare a Share Purchase Agreement and a 10% deposit is paid to the vendor’s lawyer and a completion date is agreed upon.

Depending on the location of the company, some Portuguese taxes, like IMT, may or may not apply. It is important to check the jurisdiction where the company is incorporated, as Portugal has produced a list of 83 jurisdictions that the Portuguese Government considers as “tax havens”, to which higher yearly tax rates are applied. Again your lawyer in the Algarve may help you to decide which is the best option for you.

NON-RESIDENT MORTGAGES

Mortgages in Portugal are available up to 80% loan to value (LTV) with a few banks, with the majority at 75% LTV. Interest rates will vary between 0.35% over euribor to 2.5% over euribor. Mortgage repayment periods will vary between 15 years to 40 years, dependent on the bank and the client’s age. The normal maximum age is 75 but one or two banks will lend to age 80.

Some Portuguese banks will allow interest only periods for 3 to 5 years, some offer capital and interest payments only and a smaller number of banks will offer longer periods of interest only payments. Finance is also available to build or renovate a property and three banks are currently offering mortgage finance to UK, Delaware or Malta companies to purchase a property, or for the client to purchase a company already owning a property. Interest rates are higher for this type of mortgage, normally between 2% and 2.5% above euribor with a maximum loan to value of 75%.

The banks charge administration fees, normally up to €1,000 and if it is a company loan, there are additional legal bank fees. The banks charge early repayment fees, normally of 0.5% of the amount repaid but this can vary if it is a company loan.

The Portuguese, particularly at the higher end of the market, have for many years considered the option of purchasing a property through a lease purchase scheme provided by the major banks. It is rather like a car lease: during the term the property belongs to bank, and at the end of the term, for a peppercorn payment, it will become the property of the client. During the term the property is not part of the client’s estate, the benefit is that the property is not part of the client’s tax liabilities. It is also not a mortgage and therefore not part of the client’s affordability calculations to any other borrowing.

The leasing company (the bank) pays the IMT with the cost built into the client’s monthly leasing payments. On sale of the property the lease can be offered to the new purchaser, subject to status and valuation. The equity in the property and profit still belong to the client and, subject to a minimal payment, the property can be sold. Leases are available up to 80% LTV over terms of up to 30 years. This is an interesting alternative to company ownership.